Question

XYZ Company manufactures a specialty surgical glove for hospitals. The company’s fixed costs are $400,000 per month. The variable cost of production is $12.00 per pair of gloves. The gloves sell for $20.00 per pair. Use this information for questions 1 through 3.

1. The company has budgeted sales next month to be 38,000 pairs of gloves. What will be the profit?

1. -$96,000

2. $50,000

3. $96,000

4. $304,000

5. None of the above

2. The breakeven point for next month is (in pairs of gloves – round to nearest whole number if necessary)

1. 20,000

2. 33,333

3. 50,000

4. 57,000

5. None of the above

3. The company has revised the budget for next month. It shows a profit goal of $200,000 for the month. The number of pairs of gloves that must be sold to meet this goal is

1. 12,000

2. 25,000

3. 50,000

4. 75,000

5. None of the above

Answer 1

Total cost for the company = Fixed cost + Number of gloves * Variable cost of production per pair of gloves

Profit = Selling price * Number of gloves sold - Total cost for the company

1) The profit for budgeted sales of 38,000 pairs of gloves

= 20*38000 - (400,000 + 12*38000)

= -$96,000

2) At breakeven point , net profit = 0

The x be the breakeven point

Thus, 20*x - (400,000 + 12*x) = 0

-> x = 50,000

3)

Let y pairs of gloves need to be sold to get a profit of $200,000

-> 20*y - (400,000 + 12*y) = $200,000

-> y = 75,000